TABS Analytics | CPG Sales Analytics | TABS Analytics Blog

THE REAL STORY ON WHY TARGET CANADA FAILED

Written by TABS Analytics | January, 23 2015

Target is finally handing Canadians the deep discounts they crave on shampoo, smartphones and swing sets. Too bad it's for the last time. In one of the great humiliations of North American retail history, Target has begun liquidating more than 130 stores in Canada, after just two years of operation that spurred $2 billion in operating losses.

Scrambling to eulogize Target's disaster, pundits and analysts have harped on supply-chain snafus, poor store locations and stiff even price competition with Walmart. Adding to the indignity, Target even got a lecture from Sears Canada CEO Ron Boire, who blasted its refusal to tailor goods to local tastes.

"You can't just cookie cutter a strategy into the market and have it play out the way you want," Boire told an interviewer, noting that shoppers in Montreal were different from shoppers in Toronto or Calgary.

In fact, Target's problems in Canada had less to do with cutting cookies, and everything to do with cutting prices. Namely, it never learned how to do it, Canada-style.

Overall, one of the biggest myths about the Canadian retail market is the idea that it's more competitive on price than the US market. In fact, the opposite is true. The second big myth is that Canadian shoppers aren’t like American shoppers.

Let’s dispense with the myth of distinct shopping differences between countries first, as it is easiest to debunk. With the exception of maybe the nether regions of Quebec, take a look at the relative market shares in brands between the US and Canada. They are remarkably similar. In fact with the exception of the absence of some minor brands that can’t generate enough scale to have a presence in Canada, the typical American shopper would feel very much at home in a Canadian retailer and vice versa. We can also debunk this myth by looking at the relative sizes of categories between the two countries. Again, the Canadian market size much more often than not comes in at 10-13 percent of the US level.

There is, in fact, one major difference between shoppers of the two countries, and that leads us to debunking myth #1: Canada has more price competition than the US. It is a fundamental law in economics that the degree of price competition is directly related to the number of competitors in a market. Canada has far less retail competitors than the US. For example, the New York metro area -- with a slew of big grocery chains like ShopRite, Pathmark, Whole Foods and A&P duking it out against CVS, Walgreen's, Walmart and Costco -- is unlike anything Canada has ever seen.

By comparison, Toronto has maybe half a dozen big players on price, led by Loblaw's and Shopper's Drug Mart, Sobey's and Rexall/Pharma Plus squaring off against US foes like Walmart. In Toronto, this relative lack of competition has resulted in everyday pricing that's higher than in the US, not lower. That’s in Toronto, Canada’s #1 metro market. Consider markets that are much less populated and far more remote than what we see in the US; markets such as Vancouver, Winnipeg and Calgary. So with less competition and higher distribution cost it stands to reason that everyday pricing will be significantly higher in Canada than in the US. TABS Group has conducted quite a bit of cross-border analysis to confirm this.

There's a catch to this, however, and it's a big one: These chains north of the border are ruthless when it comes to weekend sales, door busters and otherwise eye-popping discount events. Pursuing what retail insiders like to call a "high/low" or "promotional" pricing strategy, Canada-based chains like Shopper's Drug Mart stage promotions much more often than a CVS or Walgreen's would. It's not unusual to promote a given item two weeks out of three, versus one out of three in the US…that’s twice the promotional frequency in Canada.

Upping the ante, the discounts are much deeper -- 30 percent to 45 percent off during a sale, versus the typical 20 percent and 25 percent discounts seen in the US. (Interestingly, discounts of 50 percent and more are rarer in Canada, saved for the really big occasions).

If all of this sounds like madness, it's a distinctly Canadian brand of it -- demanded by Canadian shoppers, and dutifully delivered by stores. As a result, Canada-based retailers typically derive between 30 and 40 percent of their revenue from these promotions, versus 15 to 20 percent for US retailers. By my estimation, Target sacrificed 15-20 percent more in retail sales due to their failure to conform to the promotional expectation of the Canadian consumer. With their modest deal offerings more like what they offer in the US, Target Canada had an immediate revenue shortfall which was the difference between success and failure.

Why, it has been asked, did Target give up so suddenly and so quickly in this market? Why was one of the biggest, most successful retailers in US history, cowed by a retail market a tenth the size of its home turf? It's worth pointing out that Target's new CEO Brian Cornell had been CEO of Walmart's Sam's Club division for years before he was tapped more recently for a top post at Pepsi. Was the new boss too steeped in Walmart's "Everyday Low Pricing" model to stomach what's necessary in Canada?

That would be ironic, given that Walmart itself has done a good job learning how to dangle deals north of the border. Walmart is an EDLP Hybrid operator in Canada as compared to almost pure EDLP in the US. They recognized that a high percentage of Canadian consumers are unable to absorb the higher everyday prices that are available to them.

Of course, it could also be that Target's new CEO sees still more fundamental problems that need fixing. The shortcomings of Target's supply chain have been widely discussed and documented -- most vividly in recent photos on Twitter that show vast expanses of empty, sad-looking shelves where there ought to be socks, underwear, shoes and frozen TV dinners.

Indeed, the dirty little secret is that Target has always had logistics issues in the US, and has used Band-Aid solutions to minimize the problem, such as requiring manufacturers to merchandise their stores for them or stuffing their shelves with excess inventory to squeeze just a few more weeks of in-stock conditions before they ran out-of-stocks again.

Target has exported these nagging difficulties to a country that is larger than the US geographically, but with far fewer stores and shoppers. Not good, considering that deft logistics are crucial for keeping shelves properly stocked before, during and after splashy sales events.

While all of this looked bad from the beginning, Target succeeded in making everything even worse than it might have been. It opened more than 120 stores at once in early 2013, sparking a PR disaster with prices that were as much as 25 percent higher than what they saw advertised by US stores online. Meanwhile, workers griped to reporters about paltry, US-sized paychecks.

To many, this seemed like a temporary problem with an inevitable solution. But Target never recovered. Maybe that's because Target was hamstrung by other, distinctly American retail habits as it struggled. Loyalty cards, for example, aren't used much in Canada. The largest chains don't require them for most of their offers, and accordingly generate much bigger responses to their sales events.

Target, which has long used its RedCard to cultivate "guests" who will pay up its "cheap chic" fashions and housewares, learned the hard way that you've got to get those people into the door first.

In Canada, that means you've got to be sophisticated when it comes to concocting and executing sales promotions that will grab shoppers' attention. That's a different kind of sophistication, it turns out, than the kind that built "Tar-zhay" in the US.

In Canada, more now than ever, "Tar-zhay" just sounds like phony French.